DP13191 Life below zero: Bank lending under negative policy rates

Author(s): Florian Heider, Farzad Saidi, Glenn Schepens
Publication Date: September 2018
Keyword(s): bank balance-sheet channel, bank risk-taking channel, deposits, Negative Interest Rates, zero lower bound
JEL(s): E44, E52, E58, G20, G21
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13191

We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.